Larry Summers "Fed Rate Hike Probability 16%"
Walmart Also Revises Inflation Outlook
SOFR Options Market Reflects 6% Chance of Hike This Year
US inflation has proven to be stronger than expected, prompting some voices in the market to warn of the Federal Reserve's (Fed) potential interest rate hikes. Some investors, who had been busy assuming rate cuts as a given and predicting the timing of such cuts, have now started preparing for the possibility of rate hikes as inflationary pressures resurface.
According to Bloomberg and the Atlanta Federal Reserve Bank data on the 20th (local time), the one-day US Treasury repurchase agreement (SOFR) options market reflected about a 6% chance that the Fed will raise rates at least once this year as of the 15th. Some investors are taking positions that would profit if the Fed raises rates, thereby hedging against the risk of rate hikes. Despite the Fed's December announcement last year forecasting three rate cuts this year, the market has not completely ruled out the possibility of additional hikes.
On Wall Street, the possibility of further Fed rate hikes has begun to be seriously discussed. Former Treasury Secretary Larry Summers ignited this discussion. In an interview with Bloomberg TV on the 16th, Summers said that due to persistent inflationary pressures, "there is a meaningful possibility that the Fed's next move will be a hike rather than a cut." He estimated the probability of a Fed rate hike at 15%. Jupiter Asset Management predicted an even higher 20% chance of additional rate hikes than Summers.
Larry Summers, former Secretary of the Treasury
Former Fed officials have also mentioned "higher rates." William Dudley, former President of the New York Fed, expressed in a Bloomberg op-ed that the current benchmark rate of 5.25?5.5% may not be sufficiently tight. He said, "It remains a difficult task to tame inflation without crashing the economy," adding, "If the neutral rate is rising, the Fed will need to keep the benchmark rate higher and for longer."
Persistent inflation is cited as the reason for the renewed debate over future rate hikes. The January Consumer Price Index (CPI) rose 0.3% month-over-month and 3.1% year-over-year, exceeding market expectations of 0.2% and 2.9%, respectively. The Producer Price Index (PPI), considered a leading indicator of CPI, also increased by 0.3% and 0.9% in the same month, surpassing forecasts of 0.1% and 0.6%. This suggests that the "last mile" of the inflation battle?the final stretch before reaching the target?will be quite challenging.
US retail giant Walmart also issued a warning about persistent inflation on the same day. Doug McMillon, Walmart CEO, announced the company's Q4 results (November last year to January this year), stating, "While the rate of price increases across Walmart products is slowing, the slope of inflation decline has eased during this period." In November last year, he had anticipated that deflation (a slowdown in price increases) might need to be managed by early 2024, but the actual decline was not as steep as expected, according to McMillon.
Earl Davis, head of fixed income at BMO Global Asset Management, said, "I expect a 75 basis point (1bp = 0.01 percentage point) rate cut this year, but it is very difficult to say with high confidence," adding, "There are many possibilities and a variety of outcomes that could emerge."
The market, which initially bet on a rate cut in March, has erased the possibility of a May cut and is now anticipating cuts in June or July. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market on this day reflected over a 91% chance that the Fed will hold rates steady in March. The probability of a May hold is also over 67%. Meanwhile, the chance of a 0.25 percentage point rate cut in June surged from the mid-16% range a month ago to the mid-54% range currently, and the likelihood of a cut in July jumped from the 2% range to the mid-34% range.
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